Attorney General Ellison secures repayment, permanent charitable-sector ban against former Journey Home Minnesota president

Settlement requires Blake Huffman to repay $60K in charitable assets he misused from veterans-housing charity Journey Home Minnesota, permanently bans Huffman from operating a charity in Minnesota

Minnesota Attorney General Keith Ellison filed a settlement agreement in Ramsey County District Court requiring Blake Huffman, the former president of the charity Journey Home Minnesota (“JHM”), to pay back $60,000 in funds that he misused from the charity. The settlement also permanently bans Huffman from operating a charity, having access to charitable assets, and soliciting charitable contributions in Minnesota. In addition, JHM must liquidate its assets, distribute them to a Minnesota-based veterans charity, and dissolve its operations.

“As the primary regulator of charities in Minnesota, it’s my job to ensure that charities are using their assets solely on behalf of their mission and the public, and that Minnesotans can trust that the money they generously donate to charities is being used for the causes they care about,” Attorney General Ellison said. “Blake Huffman took advantage of Minnesotans’ trust. He exploited the sacrifices of Minnesota’s veterans to line his own pockets. This settlement makes sure that the money will go where it’s supposed to — to help veterans afford their lives — and that Huffman will never operate a charity Minnesota again.”

In December 2019, Attorney General Ellison sued Huffman for failing to properly oversee JHM’s charitable assets and failing to operate JHM in furtherance of its charitable mission, among other things. The lawsuit alleged that Huffman, as JHM’s president, engaged in transactions that presented clear conflicts of interest; helped solicit tens of thousands of dollars to build a handicap-accessible home for a Minnesota family with terminally ill children, only to abandon the project; and attempted to cancel leases midway through tenants’ terms and increased tenants’ rent to market rates, contrary to JHM’s charitable mission. The lawsuit also claimed that Huffman abandoned JHM and its charitable mission, failed to pay its bills, and allowed some of its properties to be foreclosed upon. During the litigation, the Attorney General’s Office further discovered that Huffman had misused nearly $81,000 of JHM’s assets.

JHM owned property throughout the metro area, including Ramsey, Dakota, Anoka, and Cook counties. The lawsuit filed in Ramsey County District Court asserted that Huffman and JHM violated Minnesota’s Nonprofit Corporations Act, Supervision of Charitable Trusts and Trustees Act, and Charitable Solicitation Act.

In Minnesota, nonprofit executives owe fiduciary duties to act in the best interests of the charities that they serve, including putting the interests of the nonprofit above any personal financial interests. The Attorney General’s office provides additional information about these fiduciary duties, as well as other resources to help nonprofit leaders properly serve their organizations, on its web site at www.ag.state.mn.us/Charity/InfoNonProfits.asp.

October 2, 2020October 2, 2020

Otto Bremer’s 3 Paid Trustees Face State Charges of Violating Their Trustee Role

Trustees of the Otto Bremer Trust will once again be in court to face state charges. In August, NPQ reported on the accusations against the Trust, a $2 billion private foundation formed to help people and communities with grants for mental health and housing, crisis care for victims of domestic violence, and job placement for people with disabilities.

Among the alleged misdeeds are a 300-percent increase in salaries of three trustees and the purchase of an opulent office from which a trustee runs a for-profit company. Most alarming, though, is a plan by the trustees to sell voting stock in the trust to 19 out-of-state hedge funds. A separate board runs the bank that generates the profits for the trust, and that bank’s board sued the parent nonprofit last November, alleging that such a sale would amount to a “hostile takeover that would replace the board and set up the bank for sale,” reports Frederick Melo for Pioneer Press. Now the state of Minnesota is pursuing its own legal action.

The structure of the Bremer trust and its ownership stake in the bank is unusual in the US context. The Otto Bremer Trust owns 92 percent of Bremer Bank, the only US bank owned by a nonprofit. (Employees own the other eight percent.) For decades, dating back to 1949, this arrangement worked largely as intended; bank profits generated ongoing funding of the philanthropy, as founder Otto Bremer intended. In the last eight years alone, the foundation has provided $400 million to nonprofits in Minnesota, Wisconsin, and North Dakota.

In the US, having foundations own banks is nearly unheard of. Foundations were actually prohibited from owning businesses by law in 1969, and the Bremer Bank arrangement only persists because it was grandfathered in. But as NPQ noted last year, internationally, foundation ownership of companies is common. For instance, in Denmark, 20 percent of the nation’s gross domestic product is generated by foundation-owned businesses, and these businesses constitute an estimated 68 percent of the market capitalization of the Copenhagen stock market.

But there is always the temptation to do what in the co-op world is called demutualization. In other words, it doesn’t take a genius to realize that the trustees could earn far more money if their compensation weren’t limited by their mission. In Canada, right now, for example, Mountain Equipment Co-op—the Canadian equivalent of the 19-million-member US cooperative REI—is facing exactly this risk as trustees seek to cash out by selling the company to an outside US investor. (A member revolt may or may not succeed at stopping them).

In a different form, this appears to be the dynamic too with Otto Bremer. Specifically, it is alleged that the trustees are attempting to sell the bank and dissolve the 70-year affiliation. Ramsey County District Court Judge Robert Awsumb has received a request from the Minnesota attorney general to temporarily remove the trustees under suspicion. The attorneys for S. Brian Lipschultz, Daniel Reardon, and Charlotte Johnson, who are all listed as the Trust’s co-CEOs, filed a legal memorandum on September 21, 2020, refuting each allegation, denying self-dealing.

Voting members of a nonprofit, whether they are called directors or trustees, are generally not paid for their positions. Staff members who are also trustees, even at the CEO position, are demonstrating a conflict of interest, as the board of a nonprofit is critical in its governance. The board determines the salary for the president, CEO, or executive director. In effect, the three CEOs are voting for their own salaries.

In 2000, the trustees received a base pay of $42,000. Now, their three salaries come to $1.4 million according to the tax filing. Reviewing several years of tax filings does not reveal any other trustees or governance structure—Lipschultz, Reardon, and Johnson are the same three trustees listed on every 990PF since 1998. (1999 was the only tax filing not available).

Trusts and foundations, who must spend five percent of their assets to provide grants to charities, expect and demand those charities be responsible with the funds. Foundations are required by the IRS to receive reports from grantees on how the funds are spent. The granting foundation should live up to the guidelines it sets for its grantees, with transparency and accounting for expenses.

Five years of tax filings show that between 2013 and 2017, the Bremer Trust gave away the required five percent of their assets, averaging about $48.6 million. Now that the assets have grown to $1 billion, the Trust will have to distribute $100 million, which is the reason cited for raising cash by selling the bank.

Attorney General Keith Ellison’s office issued a 31-page reply on Thursday to the trustees’ attorneys’ statement. “Trustees minimize their conduct, fail to address the harm, and generally take no responsibility for the conduct demonstrated by the attorney general,” it reads. “Not a single unnecessary day should pass with trustees continuing to act as fiduciaries for the trust while defending their own interests.”

Bremer, a $13 billion bank, is the largest lender for farms in Minnesota. Its funding region also includes Wisconsin and Montana. The legal troubles, as noted above, go back to last November, when the bank board sued the foundation for trying to sell bank stock to out-of-state hedge funds in order to set up a hostile takeover. If the bank board was replaced as the result of a takeover, it would ease the way to selling the foundation’s major asset—the bank.

The Bremer Financial Corporation, parent company for the bank, states through their attorneys that selling the shares to out-of-state investors betrays the original documents and the stated trustee fiduciary responsibilities, even in the event of “unforeseen circumstance”—with the foundation in control of the bank—that that founder, Otto Bremer, established almost 80 years ago.

Ellison’s office has also charged that the Trust employees work in an emotionally toxic environment, with no complaint structure and the threat of retaliation for voicing objections, with an employee describing a text message between Reardon and Lipschultz that referred to a female employee as a “doorknob.” The filing states, “Current and former trust employees testified that they feared retaliation by trustees.” The attorneys for the trustees say human resources issues must be addressed in separate legal action. Other employees and former employees indicated that there have been statements within the office regarding anti-Muslim and anti-Native American giving policies.

The Bremer Trust attorneys have requested a trial date by early 2021. The Minnesota attorney general will likely request more time. The judge could rule that the trustees temporarily step down, or the lawsuit “discovery” can go on for an extended period with the trustees in place. It appears there are more governance questions to ask this private foundation.—Marian Conway

September 18, 2020September 18, 2020

FTC Joins Four States in Action to Shut Down Alleged Sham Charity Funding Operation That Bilked Millions From Consumers | Federal Trade Commission

A sprawling fundraising operation that allegedly scammed consumers out of millions of dollars will be permanently banned from charitable fundraising along with its owner and others involved in its operation as a result of a lawsuit brought by the Federal Trade Commission and Attorneys General of New York, Virginia, Minnesota, and New Jersey.

The operation is made up of multiple companies all under the control of owner Mark Gelvan, along with his associates Thomas Berkenbush, William English, and Damian Muziani. The complaint filed by the FTC and the states alleges that the defendants served as the primary fundraisers for a number of sham charities that were the subject of numerous law enforcement actions.

The complaint alleges that the sham charities claimed to use consumers’ donations to help homeless veterans, retired and disabled law enforcement officers, breast cancer survivors, and others in need. In fact, these organizations spent almost none of the donations on the promised activities.

“This action puts fundraisers on notice: the FTC will not only shut down sham charities, it will aggressively pursue their fundraisers who participate in the deception,” said Andrew Smith, Director of the FTC’s Bureau of Consumer Protection. “If you’re giving to charity and want to make sure your donations count, start at ftc.gov/charity to learn how to spot the scams.”

“It is critically important that donors are able to trust that their contributions are being used as they intended, and not to line the pockets of individuals who exploit the generosity of others,” said New York Attorney General Letitia James. “My office will continue to work with partners such as the FTC and other states to take action that protects donors and charitable entities.”

The complaint alleges that as much as 90 percent of the money raised by the defendants for these sham charities went to the defendants themselves as payment for their fundraising services. What little money the charities did receive was rarely spent on any of their supposedly charitable missions, sometimes less than two percent.

According to the complaint, the defendants orchestrated the sham charities’ fundraising operations by soliciting donations, writing fundraising materials, and providing other key support to the sham charities. Defendants placed calls misrepresenting how donations would be used, and in many instances, the calls violated consumers’ do-not-call requests.

The defendants in the case, who have worked with each other for as long as 30 years, have been subject to numerous law enforcement actions dating back as far as 1996.

Under the proposed settlements, all of the defendants will be permanently prohibited from participating in any charity fundraising, and from deceiving consumers in any other fundraising effort, including for political action committees (PACs). The defendants will be required to clearly inform consumers at the time they ask for money that any donations are not charitable and not eligible for tax deductions. In addition, the defendants will be subject to significant monetary judgments and required to surrender assets as follows:

Gelvan, Outreach Calling, Inc., Outsource 3000, Inc., and Production Consulting Corp.: These defendants will be subject to a monetary judgment of $56,023,481, which is partially suspended based on their inability to pay. The corporate defendants will be required to surrender $45,386. Gelvan will be required to surrender $800,000, and will be required to sell two New Jersey properties he has a stake in and surrender any net proceeds of those sales.

Damian Muziani: Muziani will be subject to a monetary judgment of $484,172, which is partially suspended due to his inability to pay. He will be required to surrender $12,369.

Thomas Berkenbush: Berkenbush will be subject to a monetary judgment of $1,132,155, which is partiall suspended due to his inability to pay. He will be required to surrender $5,000.

William English: English will be subject to a monetary judgment of $873,293, which is partially suspended due to his inability to pay. He will be required to surrender $30,000. The terms of his settlement also prohibit him from participating in any fundraising activity of any kind.

The funds being surrendered by the defendants will be paid to the State of New York, which will contribute the funds on behalf of New York, Virginia, and New Jersey to legitimate charities that perform services that mirror those promised by the sham charities.

In the event any of the defendants either fails to surrender the amounts they owe or is found to have misrepresented their ability to pay, the full amount of their judgment would become payable immediately.

https://www.ftc.gov/news-events/press-releases/2020/09/ftc-joins-four-states-to-shut-down-alleged-sham-charity-operation

https://ag.ny.gov/press-release/2020/attorney-general-james-shuts-down-fundraising-operation-solicited-donations

https://www.oag.state.va.us/media-center/news-releases/1822-september-16-2020-herring-shuts-down-sham-charity-fundraising-operation-that-bilked-millions-from-consumers

https://www.nj.gov/oag/newsreleases20/pr20200916b.html

September 1, 2020September 1, 2020

Attorney General Ellison asks court to remove trustees of Otto Bremer Trust

August 12, 2020 (SAINT PAUL) — After a months-long investigation, Minnesota Attorney General Keith Ellison today asked a court to remove the trustees of the Otto Bremer Trust (OBT), Brian Lipschultz, Daniel Reardon, and Charlotte Johnson.

Two petitions and an associated memorandum of law filed in Ramsey County Probate Court today detail the trustees’ serious breaches of fiduciary duty, their longstanding failure to administer the trust effectively and in accordance with the directives of its founder, and multiple violations of state laws governing charitable trusts — culminating in a reckless hostile takeover attempt of the OBT’s primary asset, Bremer Financial Corporation (BFC), in October 2019.

The petition does not weigh in on BFC’s or any other party’s claims or conduct. Attorney General Ellison is, however, simultaneously asking the court to stay the lawsuits between the trustees and the BFC-related parties until his petition is decided.

“Minnesotans care about and for each other: they want each other to be able to afford their lives and live with dignity and respect, just as they want for themselves. Minnesotans trust charitable trusts to play an important role in that goal. Otto Bremer directed that the trust in his name not be used for ‘any purpose’ other than charitable. The trustees’ actions have abused his trust and Minnesotans’ trust,” Attorney General Ellison said.

“I do not take this action lightly,” Attorney General Ellison continued. “But as the chief law officer of the state and supervisor of charitable trusts in Minnesota, I have the duty to make sure charitable assets are used properly and for the benefit of the public, not the private aims and personal enrichment of the trustees. Because the trustees’ misconduct is particularly serious, it requires particularly serious action by my Office.”

The mission that Otto Bremer set for the trust, as outlined in the trust instrument, includes to “relieve poverty in the City of St. Paul, Minnesota,” “establish scholarship and assist poor and deserving children in securing education, to “promote citizenship, to “promote the public health, and to “aid persons suffering from catastrophe,” among other aims.

Attorney General Ellison brings this action today under the power and authority the Legislature has conferred on the Attorney General to supervise and regulate nonprofits, as the chief law officer of the state, and as the representative of public’s interest in charitable trusts, of which the public is the beneficiary.

The petition details how the trustees acted recklessly in their attempt to sell the trust’s BFC shares to a large number of out-of-state hedge funds, knowing it would trigger, in their words, “a cascade of unfortunate consequences.” Trustees’ attempt to engineer the sale of the bank enriched them significantly, exposed OBT to significant legal risk, and drained the trust of millions of dollars in expenses that should have been available for the charitable purposes of the trust. In the course of attempting to engineer the sale, contrary to the wishes of trust founder Otto Bremer as expressed in the instrument that governs OBT, trustees also withheld important information from the Attorney General’s Office so that the Office would not block their plans. By so doing, they attempted to undermine the legal authority of the Attorney General’s Office to ensure that OBT and all charitable trusts operate in strict accordance with the law.

The 2019 sale followed a years-long attempt to reframe OBT’s “brand” from a charitable foundation to a finance-focused private-equity firm benefiting their private interests. Across numerous aspects of the trust, the trustees elevated their own interests above serving its charitable purposes, including by: making self-interested grants to promote their status in the community, including million-dollar grants to charities with which they were personally affiliated; creating a hostile work environment for employees that exposed the trust to liability and created a universal fear of retaliation among employees; misusing charitable assets and self-dealing to run unrelated private businesses out of OBT’s offices; spending excessively on lavish office space and other overhead; paying themselves to redundant and unnecessary fees; significantly raising their own compensation without a corresponding rise in their duties; and creating and not remedying deficiencies in governance and oversight.

The petition requests that the court remove the trustees and appoint new fiduciaries to investigate the allegations, manage the trust, and rebuild independent oversight over the trust. It also seeks immediate remedies, including trustees’ immediate suspension or removal, to prevent ongoing harm to the trust like illegal investments, restructuring the trust to shield it from oversight and liability, and incurring tens of millions of dollars in legal fees.

Attorney General Ellison is proposing that the court appoint Pamela Alexander, Marcia Avner, and Carleen Rhodes as interim trustees. Ms. Alexander is a retired judge of Hennepin County District Court, Ms. Avner is a former public policy director of the Minnesota Council on Nonprofits, and Ms. Rhodes is the former president and CEO of The Saint Paul Foundation and the Minnesota Community Foundation.

The Court File Number for the case is 62-C9-61-315222.

June 25, 2020June 25, 2020

Minnesota Attorney General’s Office releases publication on charitable giving for those individuals who may be new to raising money for a cause they believe in.

What Individuals Need to Know When Raising Money for a Charitable Cause

https:///Consumer/Publications/RaisingMoney.asp

You Might Be a “Charity”—Yes, You!

Minnesotans are generous people during the best of times. When faced with hardships like natural disasters, pandemics, or other emergencies, many step up that generosity even more by raising money to help people in need through giving platforms like GoFundMe, on social media, or through fundraising events. You should know that raising money to help people comes with specific duties under the law that apply to everyone—not just nonprofits and charities. They may even apply to you.

Some generous people raise money to help specific people facing hardships. Raising money to benefit a specific individual, business, or family is not “charitable” under the law. On the other hand, if you fundraise money or collect goods for a general charitable purpose to help the greater good—such as protective equipment for healthcare workers, food for families in need, or money to help communities rebuild and repair—that conduct comes with important duties and responsibilities under the law.

It is important to be aware of the important responsibilities that you have when others trust you with their charitable donations. “Charitable” donations can be for a wide variety of causes, including social services, education, the public interest, or the arts. You don’t need to be a 501(c)(3), a nonprofit, or other organization to be subject to charitable giving laws. In fact, any person raising money in Minnesota for a charitable purpose can be a “charity” under the law. This publication is intended to help you navigate the duties that come with fundraising for a charitable cause.

What Laws Do I Need to Follow if I Fundraise for a Charitable Cause?

You must share specific information when you ask for charitable donations, such as where donations will go, whether the donations are tax deductible, and how donations will be used. See Minn. Stat. § 309.556.
It is important to be very clear what you will do with people’s money when you fundraise. You cannot be misleading or deceptive when raising charitable funds. Minn. Stat. § 309.55.
You must be very careful to use the money you fundraise for the exact purpose donors intended. People who fundraise charitable funds have strict fiduciary duties to safeguard that money. Minn. Stat. § 501B.41, subd. 6. To fulfill these duties, you must, among other things, only spend money as the donor intended, and have procedures in place to make sure the money is used properly, as described further below.
At any time, the Minnesota Attorney General’s Office may request information like donation records, bank statements, and receipts to look into potential violations of these laws. In addition, if you raise more than $25,000 and meet some other conditions, you may have to register and file specific paperwork with our Office. See Guide to Minnesota’s Charities Laws.
While the vast majority of people raising money for charity are careful to follow these laws, there can be consequences for those that do not. The AGO can go to court to get a violator to stop the conduct and seek penalties up to $25,000 for each violation. See Minn. Stat. §§ 309.57 subd. 1; 501B.41 subd. 7. There may also be criminal or other penalties that are outside of the scope of this publication for people who misuse charitable donations.
You need to be aware of potential tax consequences that come with raising money. This is outside the scope of this publication. Consult an attorney or accountant if you need help.

What Steps Can I Take to Protect Charitable Funds?

Be honest, upfront, and specific with donors about how exactly their donations will be used. Be transparent about any expenses, such as fees charged by a fundraising platform that might reduce the actual amount going toward the charitable purpose.
Keep careful records of how much money you raise and where the money goes. Specifically, keep (1) bank statements, (2) receipts of donations, (3) receipts of how you spent the money, and copies of other records. You should track and account for every single penny that comes in the door, and every single penny that you spend.
Consider setting up a separate bank account to safeguard the funds you raise for charity. Avoid comingling charitable funds with your own money in your personal bank account.
Create checks and balances to ensure the money safely gets to its destination. For example, have more than one person in charge of receiving, recording, and depositing donations, and require multiple people to sign checks and approve the money you spend.
Be especially careful with cash, because it is difficult to trace and easily lost. It is best to have two people simultaneously count any cash donations.
At the end of the fundraiser, update your donors about how their money was used.

Where Can I Learn More?

If you would like to learn more, the Minnesota Attorney General’s Office offers several resources, including Guide to Minnesota’s Charities Laws, Fiduciary Duties of Directors of Charitable Organizations, and Don’t Just Follow the Crowd on “Crowdfunding” Websites. You can find additional information on our website at www.ag.state.mn.us.